Marketplaces in practice: from set up to start up

One of the most widely developed strategies in recent times is the creation of marketplaces, whether general or sector-specific. However, making changes to the business model to set up a marketplace has internal implications that have to be addressed to maximise its benefits.

Below we list the main aspects to consider, from an organisational standpoint, in the first phase of the project: the definition of the strategy. In later instalments, we will discuss the key factors involved in setting up, and then starting up, the marketplace.

Preliminary concepts of marketplaces

In this article, we make no distinction between marketplace operators that are wholesalers or manufacturers targeting professional customers (B2B), and manufacturers or retailers targeting end consumers (D2C/B2C). When we talk about an operator, therefore, we do so in a generic sense, whether B2B or B2C, as the organisation that launches and runs the marketplace.

It is also increasingly common to find marketplaces for services, not just for selling products. However, to make it easier to understand the text, we will focus on physical products.

About the marketplace decision

The strategy can be based on different criteria. It's important to recognise operators who want to get into verticalisation, that is, to set themselves up as a benchmark for products or services in a specific sector. To do this, they supplement their current offerings with new products that add significantly to their catalogue.

This strategy is common in wholesalers that have not decided to expand their current catalogue and try out, via a marketplace, potential new manufacturers they can eventually incorporate as distributors into a more traditional model. In other words, the marketplace model would serve as a preliminary step to see if the product has a market among the operator's usual customers.

What model to implement?

It is important to note that there is no single marketplace model.

First, the operator's role with respect to the sellers has to be established. If the operator already has products similar to those that the sellers are going to offer, we can start with a purely competitive model, or, on the other hand, opt for models in which the sellers only offer complementary products that do not compete with the operator's.

Additionally, the operator must decide what product category the potential sellers will be included in. It can do this for the entire catalogue or for specific categories. Even in the latter case, they can opt for new categories that extend to the product range that the operator offers right now.

Every marketplace has a price (featured deal) that the system highlights above the rest if there are competing offers for the same product. The rules can be simple, such as "the best price for the customer wins", but usually a combination of rules is used in which variables such as the seller's rating from previous buyers, or the shipping costs, are taken into account to some degree.

There are other variants besides the two models described. For example, in the purely competitive model, the system can choose which products the system will highlight over others, but selecting to always show the operator's product in first place if it offers it. Or pure competition can be allowed, though this is less common.

The non-competitive model also offers several variants. There are operators who do not want sellers to compete for the same item and offer a single price. This can be done dynamically, or rules can be set up beforehand to assign items or categories to specific sellers.

Fees... or not

The traditional marketplace model is a fee-based model. The type of fee applied can vary by category and seller based on the strategies defined below.

From an accounting point of view, the operator charges the fee for providing a service: the operation of the marketplace. However, there are variations on this model. The main difference is determined by who invoices the end consumer. In the traditional marketplace model, the seller invoices the end consumer. The seller also sets the price and the promotion.

However, there are operators who want to maintain a direct relationship with the customer. This mainly tends to affect customer service, but also logistical aspects.

At the other extreme, which wouldn't be a marketplace, strictly speaking, are scenarios typical of dropshipping, in which the consumer knows that an external seller sends the goods, but the one who actually invoices is the operator. In this model, unlike the pure marketplace model, it is the operator that sets the sale price. In other words, there is a fulfilment process in which the consumer acquires the product at the time of the transaction.

From an accounting point of view, a higher income is recorded than in the pure marketplace model because the sale is made at a retail price, although the accounting profit is the same since an invoice is received from the seller for the amount of the cost of purchasing the product.

There is an intermediate model, flash title, in which the purchase price from the seller coincides with the sale price to the consumer, but an invoice is issued for services. In this case, the seller sets the sale price, just like in the pure marketplace model. With this model, the accounting result remains the same, but a higher sale is recognised, since two invoices are issued: one to the customer for the amount of the sale, and another to the seller for the commission.

Service level agreements

While consumers are used to and recognise the marketplace model, poor service from a seller also affects the operator.

A consumer buys in a marketplace for the price, but also for the quality guarantee that the operator provides for the entire process. This means the operator has to ensure that sellers comply with the service level agreements that it wants for its marketplace.

To do this, quantitative aspects have to be defined, such as the acceptance percentage to fill an order, the response time, incident rate, and others. And qualitative aspects too, such as the average rating that consumers assign to the service provided by the seller.

Payment gateways in Marketplaces

A key element is the payment gateway. There are several strategies for charging customers.

Normally, operators have to decide whether to; collect the money at the time of purchase, when the seller confirms that the order can be filled, or when the order is shipped from the seller's warehouse. Regardless of when the money is collected, in the European Union and in some other countries, the operator can't have the money in a bank account in its name if it follows a pure marketplace model. This makes sense if we think about it on an accounting level, because the operator would receive money in their account for a product it hasn't sold. It would only be allowed to receive the part associated with the fee, that is, with the services it will charge to the seller and for which it can provide an invoice.

In another scenario, if the money were transferred to the seller at the time of purchase, then if the consumer withdraws from the transaction, the operator would have to refund the sale using money it did not receive. The way around this situation is through escrow accounts in the name of the sellers, in which the money is deposited until, as part of the periodic reconciliation cycle, the amounts are transferred to the seller for those products that are no longer subject to the return period in effect in the marketplace.

This legal situation has technical implications involving payment gateways. Not all the gateways are set up for this model, in which case third parties have to be integrated into the system.

Complementary services in Marketplaces

Once the model and strategy are set up, complementary services can be considered. The most obvious one is logistics.

There are operators who, like Amazon with its "Fulfilled by Amazon" service, handle the shipping. These operators want to interface with the end consumer and thus offer the first level of customer service.

The operator will delegate the shipping to its trusted logistics operators, while ensuring the consumer that the delivery is being coordinated by the operator. The end consumer can view this as a seal of trust, and the operator can receive an additional marginal income. Depending on the operator's strategy, it may impose certain courier services on the sellers, although this is usually done in very specific geographical areas or that are under the relative control of the operator.

Summary

When setting up a marketplace strategy, there are many aspects to consider. For example, in addition to those mentioned, the decision to include national or international sellers is important, since it affects the applicable taxes, delivery times, customs, etc.

All these aspects have to be considered before the marketplace can be set up. Having a reputable company with experience in all the models described is a guarantee of success.

Marketplaces offer a very advantageous business model, but they must be based on a solid foundation and consistent with the company's expectations. At SEIDOR, we have significant experience implementing marketplaces internationally. We can help you not only make the right decisions, but set up platforms that grow as the model develops.